India: Between The Lines... September, 2016

I. Disputes relating to trust, trustees and beneficiaries
arising out of the Trust Deed and the Trust Act not arbitrable:
Supreme Court

Adding one more kind of dispute to the list of non-arbitrable
disputes, the Supreme Court of India in the case of
Shri Vimal Kishor Shah and Ors.(the"Appellants")
vs. Mr. Jayesh Dinesh Shah & Ors.(the"Respondents")
(decided on August 17, 2016) has held that any dispute pertaining
to affairs of a trust including the disputes inter se trustee and
beneficiary in relation to their right, duties, obligations,
removal, etc. cannot be decided by an arbitrator under the
Arbitration and Conciliation Act, 1996 (the
"Arbitration Act"). The Civil Court will
have to decide such disputes as specified under the Indian Trust
Act, 1882 (the "Trust Act").

The factual matrix of the case goes back to 1983 when one person
Shri Dwarkadas Laxmichand Modi had executed a trust deed in
relation to his properties. Shri Modi formed the trust in favour of
six people (minors at that point in time) who were the
beneficiaries under the deed. Dispute resolution mechanism was laid
down in clause 20 of the deed which provided for resolution by
arbitration.

Disputes started to arise between the beneficiaries from 1989-90
onwards. Exchange of notices, allegations and counter allegations
followed. Ultimately, as the disputes remained unresolved and the
parties could not agree on appointment of an arbitrator,
application under Section 11 of the Arbitration Act came to be
filed before the Bombay High Court for referral of all disputes to
arbitration. The Appellants had opposed the application before the
High Court, arguing that neither the Appellants nor the Respondents
were parties to the deed and also they had not signed the deed.
Thus, the stance taken by the Appellants was that Appellants and
Respondents could not be construed as "party" to the deed
and the deed could not be termed as an "agreement" much
less an "arbitration agreement" within the meaning of
Section 2(b) and 2(h) read with Section 7 of the Arbitration Act.
In a nutshell, according to the Appellants, there was no valid and
enforceable arbitration agreement.

The Bombay High Court took the view that beneficiaries could be
held as "party" to the deed under Section 2(h) of the
Arbitration Act as they had attained majority and had taken benefit
under the deed throughout their minority as beneficiaries.
Therefore, recourse to proceedings under Section 11 of the
Arbitration Act was held to be permissible and a sole arbitrator
was appointed.

The apex court considered the rival submissions of the parties,
the applicable provisions under the Arbitration Act and the
relevant case laws. The Court also examined the scheme of the Trust
Act. The Court took note of a case (Booz Allen and
Hamilton Inc. vs. SBI Home Finance Ltd. and Ors.;
decided on April 15, 2011), in which, the apex court had laid down
a list of six non-arbitrable disputes. The Court added one more
kind of dispute to this list by opining that there was an implied
bar of exclusion under the Trust Act on applicability of the
Arbitration Act for deciding the disputes relating to trust,
trustees and beneficiaries through private arbitration. Therefore,
cases arising out of trust deed and the Trust Act cannot be decided
by arbitration.

The Court concluded by ruling that, "we hold that the
application filed by the Respondents under Section 11 of the Act is
not maintainable on the ground that firstly, it is not based on an
"arbitration agreement" within the meaning of Sections
2(b) and 2(h) read with Section 7 of the Act and secondly, assuming
that there exists an arbitration agreement (clause 20 of the Trust
Deed) yet the disputes specified therein are not capable of being
referred to private arbitration for their adjudication on
merits."

VA View

The Supreme Court's decision in the instant case clarifies
the meaning of the term 'arbitrability' of a dispute. The
decision lays emphasis on the fact that though there may be an
arbitration agreement between the parties but if the dispute is not
arbitrable then the dispute cannot be resolved by arbitration but
the dispute will have to be resolved by a civil court or the
respective authority conferred with the jurisdiction to do so by
the respective statute.

II. Court is required to examine the validity of only the
arbitration agreement and not the substantive contract under
Section 45 of the Arbitration Act: Supreme Court

The Supreme Court of India in the case of Sasan
Power Limited(the"Appellant")vs. North American Coal Corporation India Private
Limited(the"Respondent") (decided
on August 24, 2016) observed that for the purpose of deciding
whether the suit filed is maintainable or impliedly barred by
Section 45 of the Arbitration and Conciliation Act, 1996 (the
"1996 Act"), the Court is required to
examine only the validity of the arbitration agreement and not the
substantive contract.

The Appellant and an American company, namely, the North
American Coal Corporation (the "NACC")
had an agreement between them for mine and development operations
(the "First Agreement"). The governing
law of the First Agreement was the law of the United Kingdom and
provided for resolution of disputes through arbitration by
International Chambers of Commerce (the
"ICC") with place of arbitration at
London. In 2011, an agreement was entered into between the
Appellant, the NACC and the Respondent (the "Second
Agreement"), by which the NACC professed to assign
all its rights and obligations to the Respondent.

After disputes started to arise between the Appellant and the
Respondent, the Respondent made request for arbitration in 2014.
The Appellant went to Court of a District Judge in Madhya Pradesh
and sought certain reliefs, including asking for a decree of
declaration to hold arbitration request as null and void being
contrary to Indian law. An ex-parte order injuncting the ICC from
proceeding with the arbitration was passed but was vacated later on
an application by the Respondent. When the matter reached the
Madhya Pradesh High Court, the High Court was of the view that the
parties had to be referred to arbitration and the appeal filed by
the Appellant was dismissed. The Appellant preferred an appeal
against this decision before the apex Court in this case.

The stance of the Appellant was that parties to the arbitration
were two Indian companies which could not have an agreement with
foreign governing law as such stipulation was contrary to the
public policy and was hit by Sections 23 of the Indian Contract
Act, 1872. This was based upon the understanding of the Appellant
that by virtue of the assignment under the Second Agreement, the
NACC had novated the Second Agreement in favour of the Respondent.
Therefore, the Respondent took the position of NACC and the Second
Agreement stood between the Appellant and the Respondent, both
being Indian parties.

The Court examined the two agreements in detail to come to terms
with the nature of the assignment made under the Second Agreement.
The transaction under the Second Agreement did not appear to the
Court as an assignment as Court noted that the NACC was not
discharged from its obligations under the First Agreement. The
Court noted that such transaction rather created an agency or was
like a sub-contracting or vicarious performance agreement.
Therefore, the Court noted that the disputes were between three
parties and the stipulation of governing law could not be said to
be an agreement between only two Indian companies as the NACC as
foreign party was also present.

The pleading of novation was also rejected by the Court, by
giving reasons as under:

"(i) There cannot be any novation between the American
company and the Respondent because prior to the AGREEMENT-II, there
was no agreement whatsoever between them.

(ii) The Respondent cannot be said to have stepped into the
shoes of the American company because the obligations under
AGREEMENT-I owed by the American company to the Appellant were not
discharged by the AGREEMENT-II."

Further, with regards the argument that stipulation of governing
law being contrary to the public policy and hit by Section 23 of
the Indian Contract Act, 1872, the Court was of the view that even
if the submission was accepted, it could not invalidate the
arbitration agreement as that was independent from the substantive
contract. The Court held that, "the scope of enquiry under
the Section 45 does not extend to the examination of the legality
of the substantive contract. XXXX For the purpose of deciding
whether the suit filed by the Appellant herein is maintainable or
impliedly barred by Section 45 of the 1996 Act, the Court is
required to examine only the validity of the arbitration agreement
within the parameters set out in Section 45, but not the
substantive contract of which the arbitration agreement is a
part."

The Court finally observed that Section 45 of the 1996 Act made
it obligatory on the Court to refer the parties to arbitration
after it was clear that the agreement is neither null and void nor
inoperative and incapable of being performed. The appeal was
dismissed and the order of the Trial Court was modified to the
extent of referring the parties to arbitration as mandated by
Section 45 of the 1996 Act.

VA View

It may be noted that the decision of the Madhya Pradesh High
Court in this matter captured wide attention as the High Court had
considered the issue whether two Indian parties could have foreign
seated arbitration. However, it is pertinent to note that this
issue was not dealt with by the Supreme Court in this case as the
Appellant had given up this argument before the Supreme Court and
therefore the Supreme Court did not consider this issue in this
judgment.

Considering this ruling coming from the apex court, scope of
enquiry under Section 45 of the 1996 Act is restricted to
determining the validity of the arbitration agreement and a court
cannot embark on an adventure to examine the validity of
substantive agreement under Section 45 of the 1996 Act, in line
with the view that arbitration agreement is independent of the
substantive agreement.

III. Employer cannot enforce covenant in restraint of trade in
guise of a confidentiality clause: Delhi High Court

Under the guise of confidentiality covenant, the employer cannot
restrain the ex-employees from competing with the employer, held
Delhi High Court ("Court") in
Stellar Information Technology Private Ltd. vs. Rakesh
Kumar and Ors.

The Plaintiff i.e. employer was a private limited company
engaged in providing data recovery, data migration and data erasure
solutions to clients in India and abroad. The Defendants included
(i) past employees of Plaintiff, (ii) spouse of these employees and
(iii) a company ("Techchef") wherein
spouse of these ex-employees were promoters and directors.

It was Plaintiff's case that Defendants 1 to 3 were
ex-employees of Plaintiff and during their employment with
Plaintiff, the Defendants 1 to 3 had access to Plaintiff's
confidential information, trade secrets, knowhow, client
information, etc. ("Confidential
Information"). The Plaintiff pleaded that although
Techchef was run by spouse of these ex-employees, the actual
business was being carried on by the ex-employees who were in de
facto control and management of Techchef. The Plaintiff further
alleged that these ex-employees were using Confidential Information
to conduct business similar to that of Plaintiff and consequently
violated the terms of "Employee Confidentiality
Agreement" and "Confidentiality and Invention Assignment
Agreement".

The Court considered the relevant clauses in the aforesaid
agreements and came to the conclusion that contact details could
not be said to be confidential, considering it was available in
public domain.

In their defense, the Defendants had stated that the 'client
information' referred to by the Plaintiff was available in
public domain in as much as the names of almost all large customers
of Plaintiff were published on the Plaintiff's website and
customers who avail such services were known in the market. The
Plaintiff countered that unlike names of customers, their contact
details were not easily available in public domain. Consequently
the Defendants violated their confidentiality obligation by using
Plaintiff's client information. The Court did not accept this
argument and held that the client contact details could have been
found by the Defendants by their own efforts.

Court noted, "The fact that the Defendants have
approached some of the Plaintiff's customers does not in the
given facts establish that the Defendants are using any proprietary
information of the Plaintiff."

Court held that by expanding the width of the expression
'confidential information' to include information which is
in public domain, the Plaintiff is not seeking protection of
proprietary or confidential information, but is essentially seeking
a restraint on trade triggering Section 27 of the Indian Contract
Act, 1872.

Court observed, "The contention of the Plaintiff that
the restriction to carry on competing business is for a limited
time and is therefore, reasonable and consequently, enforceable
cannot be accepted. Once it is held that in the guise of a
confidentiality clause, the Plaintiff is attempting to enforce a
covenant in restraint of trade, the same must be held to be
void."

VA View

These kind of disputes are now very common in India and there
have been several decisions on the point of enforceability of
non-compete clauses specifically. It may be worth noting that Court
in this case observed that if names of clients were available in
public domain, such client contacts were not confidential
information. In sectors where the client base is largely restricted
to few easy identifiable names in the market, employer will face
difficulty in contending that an ex-employee violated the
confidentiality clause by accessing the client lists or any such
database. Further, in such cases, there will be no remedy to stop
the ex-employees from approaching the clients or not compete with
the ex-employer as the same would be hit by Section 27 of the
Indian Contract Act, 1872.

IV. SEBI questions legality of Crowdfunding

The Securities and Exchange Board of India
("SEBI") issued Press Release No.
137/2016 dated August 30, 2016 titled 'SEBI CAUTIONS
INVESTORS'(the "Press Release") as a
measure to warn the investors and put them on alert against certain
practices in the market.

Certain
schemes/leagues/competitions

SEBI has taken note of certain schemes/leagues/competitions
unrecognized by SEBI/ recognised Exchanges that are used as a tool
to solicit investors. Some of these even offer prize money. SEBI
has made it clear that participation in such schemes will be at
investors' sole risk and in case of disputes relating to such
schemes or enforcement of any related agreement, aggrieved
investors of such schemes will not be able to take recourse to the
following:

Benefits of investor protection under
SEBI/ Exchange(s) jurisdiction

Exchange dispute resolution
mechanism

Investor grievance redressal
mechanism administered by Exchange(s)

Unauthorized Electronic
Platforms

This is significant in view of the intense debate on crowdfunding
doing the rounds in India and considering the fact that substantial
chunk of start-up funding comes from crowdfunding. SEBI had also
issued consultation paper on crowdfunding in India in 2014.

In the Press Release, SEBI has noted that certain unrecognised
electronic platforms are becoming a source for raising fund online,
similar to stock exchanges. It is pointed out that such investment
happens in the form of private placement with companies in blatant
violation of the Securities Contract (Regulation) Act, 1956 and the
Companies Act, 2013 and that therefore, the investors should be
wary of such dealings which violate the law.

Un-registered investment
advisers and research analysts

Many times, investors rely, to make their market strategy, on
casual advice/updates given by fake advisors in the market. SEBI
has advised the investors to be cautious in dealing with
unregistered investment advisers / research analysts and to not
rely on their advice given now a days through text messages and
other media.

VA View

As per SEBI, only recognised stock exchanges can provide
electronic platforms where equity and other corporate securities
could be listed and traded. As the startup activity in India
gathers momentum, major equity crowdfunding platforms (ECP) players
like Grex, LetsVenture, Termsheet, Equity Crest and Tracxnfor
funding startup companies have emerged. SEBI is worried about small
investors getting sucked into unknown, illiquid companies marketed
by ECPs.

Start-up funding may take a hit as SEBI seems to take a
stringent approach to stop the trend which is not in compliance
with the current legal and regulatory framework. On the one hand
the Government is serious about having a startup ecosystem in
India, however with this press release by SEBI, concerns over this
funding route for Indian start-ups, remain.

V. Union Cabinet approves liberalisation of FDI norms for
NBFCs

As per the press release dated August 10, 2016, issued by the
Press Information Bureau, Union Cabinet has given its approval to
amend regulation for foreign investment in the Non- Banking Finance
Companies (the "NBFCs"), a much needed
move on part of the Government after signals of such policy change
were given earlier in the year when the same was mooted by the
Hon'ble Union Finance Minister in his budget speech for
2016-17. Under the current regime on foreign direct investment as
per the Consolidated Foreign Direct Investment Policy 2016 (the
"FDI Policy"), foreign investment in
NBFCs is allowed under the automatic route in only the following
eighteen activities:

Merchant Banking

Under Writing

Portfolio Management Services

Investment Advisory Services

Financial Consultancy

Stock Broking

Asset Management

Venture Capital

Custodian Services

Factoring

Credit Rating Agencies

Leasing & Finance

Housing Finance

Forex Broking

Credit Card Business

Money Changing Business

Micro Credit

Rural Credit

Such investments are also subject to minimum capitalisation
norms as one of the conditions laid down in the FDI Policy.

Coming to the proposed changes, approval has been given for:

Amendment in the existing Foreign
Exchange Management (Transfer or Issue of Security by the Person
Resident outside India) Regulations, 2000 on the NBFCs which will
pave the way for inflow of foreign investments in "Other
Financial Services" (other than the eighteen activities
mentioned above) on automatic route.

However, such services should be
regulated by any financial sector regulators like the Reserve Bank
of India, Securities and Exchange Board of India, etc. or
government agencies. Foreign investment in services which are not
regulated by any regulators or government agency would be under the
approval route.

Further, minimum capitalisation norms
under the current regime have been eliminated considering the fact
that regulators prescribe their own minimum capitalisation
norms.

VA View

This policy trend of the Indian Government of liberalizing the
FDI norms is here to stay. Government has again eased the FDI
norms, this time for NBFCs.

Foreign investment in NBFCs will come under the automatic route
provided they are regulated by any of the financial sector
regulators. But entities not regulated by any of the regulators
will need approval from the Foreign Investment Promotion Board
(FIPB). Easing of minimum capitalization norms is a welcome
move.

Once it comes into force, this is sure to give a major boost to
the investments in the sector.

The content of this article is intended to provide a general
guide to the subject matter. Specialist professional advice should
be sought about your specific circumstances. The views expressed in
this article are solely of the authors of this article.

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